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3. The index model has been estimated for stocks A and B with the following results. Answer the questions based on the Single Index Model.
3. The index model has been estimated for stocks A and B with the following results. Answer the questions based on the Single Index Model. The risk- free rate is 2%. rA - r;= -1.0% + 1.5 (rM - r.) + A rB - PE 0.4% +0.8 (IM re) + eB; IM = 20% 0 (CA) = 10% (EB) = 5% a. Draw the characteristic line of stock A. Indicate the vertical/horizontal axis variables, the slope and the intercept. b. Find the systematic risk, unique risk and total risk of stock A. c. You have $10,000 available for investment. If you borrow another $4000 from the bank at the risk-free rate and invest $6,000 in the market portfolio, $5,000 in stock A and $3,000 in stock B. What is the systematic risk, unique risk and total risk on your $10,000 fund? 3. The index model has been estimated for stocks A and B with the following results. Answer the questions based on the Single Index Model. The risk- free rate is 2%. rA - r;= -1.0% + 1.5 (rM - r.) + A rB - PE 0.4% +0.8 (IM re) + eB; IM = 20% 0 (CA) = 10% (EB) = 5% a. Draw the characteristic line of stock A. Indicate the vertical/horizontal axis variables, the slope and the intercept. b. Find the systematic risk, unique risk and total risk of stock A. c. You have $10,000 available for investment. If you borrow another $4000 from the bank at the risk-free rate and invest $6,000 in the market portfolio, $5,000 in stock A and $3,000 in stock B. What is the systematic risk, unique risk and total risk on your $10,000 fund
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